Weaning Britain’s economy off furlough

Rishi Sunak faces a wall of resistance from businesses and trade unions to Treasury plans to end his furlough scheme at the end of October. Those calls will grow louder if, as is expected, unemployment soars in the coming months. But there is a case for changing tack as long as the country can avoid another surge in Covid-19 cases that leads to a national lockdown. Rather than prolonging the furlough programme, taxpayers’ money would be better spent — and the interests of workers and companies better served — by policies that boost relief to the jobless and ease the transition to sectors that are better able to thrive post-pandemic.

The scheme, launched in March, has been a significant success. Its pledge to cover up to 80 per cent of incomes of employees unable to work because the pandemic either closed down their workplace or dented demand for their labour has helped an estimated 30 per cent of the workforce to offset a collapse in earnings. That has aided not only the immediate beneficiaries, but the nation as a whole. It has raised spending and instilled confidence and a sense of unity amid the sharpest fall in output in the postwar period.

The programme remains important. According to the latest Treasury estimates, 11 per cent of the workforce were still furloughed as of mid-August. Those in favour of continuing the scheme will jump on that fact and the lack of job creation over the buoyant summer months as evidence that it needs to remain in place for longer. The Treasury believes that unless there is another national lockdown, an essentially European-style policy that keeps jobs in place should be replaced with a more US-style approach aimed at helping workers to move to more productive parts of the economy.

While this change of course carries risks, so too does extending furlough indefinitely. The schemes risk developing, like quantitative easing, a Hotel California quality — becoming ever more impossible to leave the longer they are relied upon to prop up the economy. Extending them denies the inevitability that some sectors will either be far smaller or simply cease to exist in the post-pandemic world. To continue to pay a large share of the wages of such companies risks keeping the economy in suspended animation. That would weigh on growth capacity once demand returns and eventually limit workers’ wage growth.

Yet Mr Sunak must also avoid a cliff edge — terminating one of the most generous policies ever to support the labour market without putting something in its place. The £2bn Kickstart programme, aimed at helping vulnerable young people into work, is a vital part of the new approach — especially as it is ever clearer that they will bear the brunt of the pain. At the very least, universal credit should be maintained at its current, enhanced, rate. Cuts to national insurance would help companies that are in a position to thrive to take on more staff. Mr Sunak should also be more willing than he now appears to accept there might be circumstances when the Treasury would have to revive furlough aimed at specific industries or regions that government rules force to close. The chancellor should also consider arrangements for industries where jobs are viable, but require more time to recover.

The realities of the post-pandemic economic landscape mean Mr Sunak should not extend furlough for ever. Yet unemployment is one of the worst catastrophes an individual can face; the current uncertain environment makes it even more so. The chancellor must therefore do all he can to ease those unfortunate enough to lose their jobs into new work.

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